The  Return  of 
The  Railroads  to 
Private  Ownership 


being 

Correspondence 

between 

Mr.  J.  P.  Harris,  Vice  President 

The  Citizens  Savings  and  Trust  Company 

Cleveland,  Ohio 
and 

Mr.  S.  Davies  Warfield,  President 

National  Association  of 
Owners  of  Railroad  Securities 

especially  in  regard  to  the  so-called 

“Warfield  Plan” 


Digitized  by  the  Internet  Archive 
in  2015 


https://archive.org/details/returnofrailroad00harr_0 


4 


The  Citizens  Savings  & Trust  Co. 

EUCLID  AVENUE  NEAR  EAST  9th  ST. 

CLEVELAND.  OHIO 

May  1,  1919 

S.  Davies  Warfield,  President 

National  Association  of  Owners  of 
Railroad  Securities, 

Continental  Building, 

Baltimore,  Md. 

•Dear  Mr.  Warfield: 

Through  the  kindness  of  Mr.  Baumgartner,  a copy 
of  the  Statistical  Exhibit  which  was  filed  with  the  Sen- 
ate Committee  in  connection  with  the  so-called  “War- 
field  Plan”  was  received  at  my  office  during  a brief 
absence  on  my  part  in  the  South.  Since  my  return  to 
Cleveland  last  week,  we  have  been  going  over  the 
matter  very  carefully,  with  the  aid  of  your  statements 
bearing  dates  of  January  31st  and  February  13th, 
respectively,  the  above  Statistical  Exhibit,  and  a copy 
of  Senate  Bill  No.  S-5679,  which  purports  to  embody 
the  Warfield  Plan,  and  I regret  very  much  to  have  to 
advise  you  that  the  conclusions  to  which  we  have  been 
forced,  as  a result  of  this  study,  compel  us  to  register 
emphatic  disapproval  of  the  Plan  in  its  entirety,  as 
well  as  to  specific  features  involved. 

The  matter  was  brought  before  our  Board  of  Direc- 
tors Monday  and  discussed  fully,  and  I was  directed 
to  convey  to  you  the  disapproval  of  our  Board  and,  at 
the  same  time,  to  announce  to  you  our  inability  to 
support,  either  by  influence  or  contribution  of  funds, 
the  program  above  proposed. 

You  will  recall  that  when  I was  in  attendance  at  the 
meeting  of  the  Committee  of  Seventy  in  New  York, 
early  in  March,  I expressed  doubts  as  to  certain  fea- 
tures of  the  plan  proposed,  and  my  further  study  of  the 


i 


plan  has  only  confirmed  these  doubts  the  more  strongly. 
As  I stated  to  you  at  that  time,  the  plan  and  the  above 
Bill  embodying  it  is,  to  our  minds,  a step  in  the  direc- 
tion of  outright  Government  ownership,  and  we  are 
absolutely  opposed  to  anything  of  that  sort  on  prin- 
ciple. It  has  been  stated  that  the  Bill  in  question  is, 
in  effect,  a compromise,  that  it  is  the  most  conserva- 
tive program  that,  in  the  opinion  of  its  advocates,  can 
be  secured  from  Congress,  and  that  unless  we  are  willing 
to  accept  this  program  there  is  danger  that  something 
more  radical  will  be  put  into  effect.  With  this  atti- 
tude we  are  not  at  all  in  sympathy,  and  we  refuse  to 
compromise  in  advance  of  the  struggle.  In  this  con- 
nection, may  I not  call  attention  to  the  fact  that  since 
the  Warfield  Plan  was  evolved  there  has  been  a very 
radical  change  in  public  sentiment  against  Govern- 
ment ownership  in  any  form,  which  sentiment  is  gain- 
ing headway  every  day.  Within  the  past  few  days  we 
have  witnessed,  in  connection  with  the  Postmaster 
General’s  control  of  the  wire  systems,  the  concrete 
results  of  the  aroused  public  feeling  on  this  point  on 
the  one  hand,  and  of  the  uncompromising  attitude 
with  respect  to  the  return  of  these  properties  of  Mr. 
Mackay  of  the  Postal  Telegraph  Co.  on  the  other, 
which  we  believe  is  without  doubt  the  one  compelling 
reason  for  the  Postmaster  General’s  proposal  to  return 
the  cables  and  telegraph  lines  at  the  earliest  possible 
date.  Could  anything  demonstrate  more  clearly,  with 
respect  to  the  railroad  situation,  the  unwisdom  of  any 
compromise  whatever  by  those  who  have  the  best 
interests  of  the  railroads,  the  security  owners  and  coun- 
try at  heart?  I have  in  mind  Lowell’s  classic  lines, 
“He  enslaves  his  children’s  children  who  makes  com- 
promise with  sin,”  and  so  confident  are  we  of  the  dis- 
astrous results  which  would  be  sure  to  follow  the 
enactment  of  Senate  Bill  No.  S-5679,  that,  as  security 


2 


owners  representing  probably  325, OCX), 000  of  railroad 
securities,  we  would  much  prefer  outright  Government 
ownership,  with  all  of  its  accompanying  objections, 
than  any  straddle  such  as  the  above  Bill  represents. 
The  President  in  his  Proclamation  gave  a definite 
promise  to  return  the  roads,  and,  in  our  opinion,  the 
only  way  to  return  them  is  to  return  them. 

Taking  up  specific  features  of  the  Bill  in  question, 
we  object  most  strenuously  to  a limitation  of  6%  on 
railroad  earnings.  Such  a limitation  would,  in  our 
judgment,  ruin  railroad  credit  for  all  time.  Six  (6%) 
per  cent,  is  the  minimum  dividend  that  any  prosperous 
railroad  should  pay,  leaving  only  the  pittance  which 
may  be  derived  from  excess  earnings  for  reinvestment, 
or  for  building  up  a surplus  fund  for  lean  years.  The 
Warfield  Plan  makes  no  provision  whatever  for  lean 
years,  and  by  turning  over  excess  earnings  in  the 
manner  proposed  it  creates  a situation,  where,  from 
the  standpoint  of  the  Government  and  the  employees, 
it  is  a game  of  “heads  I win,  tails  you  lose.”  If  6% 
is  to  be  the  maximum  normal  return,  on  what  basis 
will  it  ever  be  possible  to  pay  any  railroad  debts,  or 
who  would  be  willing  to  purchase  any  railroad  securi- 
ties in  the  future?  In  the  past  few  years  railroads 
have  been  required  to  pay  considerably  more  than  6% 
for  funds,  and  the  future  must  provide  the  means  for 
taking  care  of  the  enormous  obligations  thus  incurred. 

The  Bill  as  drawn  provides  that  the  standard  return 
shall  be  computed  on  the  basis  of  6%  on  “property 
investment,”  but  no  attempt  whatever  is  made  to 
define  what  is  meant  by  “property  investment,”  and 
so  much  discretion  in  regard  to  this  matter  is  apparently 
left  to  Government  agencies,  that  to  our  minds  the  pro- 
vision is  calculated  to  produce  the  utmost  friction  and 
litigation  between  the  carriers  and  the  Governmental 
agencies'  We  have  already  seen  the  spectacle  of  an 


attempt  to  arrive  at  physical  valuation,  and  while  the 
Government  has  been  spending  years  and  millions  in 
money  in  this  attempt,  we  are  still  far  from  any  help- 
ful or  definite  conclusions,  or  even  suggestions. 

The  theory  of  dividing  excess  earnings  in  three  ways 
is,  to  our  minds,  a mistaken  one.  Organized  labor  has 
for  years  contended  for  a uniform  rate  on  all  railroads, 
regardless  of  size  or  their  ability  to  earn  them.  Such 
rates  have  now  been  made  effective.  To  use  one- 
third  of  excess  earnings  to  reward  employees  of  pros- 
perous roads,  or  regions,  would  immediately  create  an 
inequality  of  rates,  which  would  at  once  result  in 
demands  for  further  increases  on  all  other  roads  to  re- 
establish uniformity  of  rates,  working  conditions,  in- 
surance or  pension  allowances,  etc.  The  theory  of 
labor  participating  has  failed  of  convincing  demon- 
stration even  in  small  units  and,  in  our  judgment,  if 
applied  on  the  vast  organizations  of  the  railroads  it 
would  never  work  out  practically,  but  would,  instead, 
prove  a boomerang  leading  to  new  labor  troubles. 

One  third  of  excess  earnings  is  not  sufficient  to  en- 
courage capital  to  finance  improvements  that  would 
bring  about  economies  of  operation.  For  example,  if 
on  a certain  railroad  $1, 000, 000  spent  for  grade  revision 
would  promise  reduction  in  operation  amounting  to 
20%  of  the  amount  to  be  invested,  one  third  of  which 
would  accrue  to  the  corporation  for  payment  of 
interest,  the  other  two  thirds  going  to  interests  that 
had  no  responsibility  in  providing  the  31,000,000, 
how  can  one  conceive  that  a Board  of  Directors  would 
ever  authorize  the  expenditure?  This  is  not  a hypo- 
thetical case,  as  I have  in  mind  a specific  instance  of 
such  an  expenditure  resulting  in  just  the  manner  men- 
tioned, which,  under  the  Warfield  Plan,  would  certainly 
never  have  been  authorized.  The  economic  waste  of 
continuing  the  old  operation,  in  the  above  example, 


would  go  on  forever,  and  not  only  would  the  public  be 
deprived  of  superior  facilities,  but  there  would  be  abso- 
lutely lacking  any  incentive  for  judicious  and  effective 
supervision  of  the  road  itself. 

Another  weakness  involved  in  the  distribution  of 
excess  earnings,  as  suggested  in  the  above  Bill,  is  that 
the  plan  takes  too  much  out  of  the  total  excess  earn- 
ings for  the  prosperous  lines  within  a given  region,  not 
leaving  enough  to  encourage  these  stronger  lines  to 
take  over  the  weaker  lines  under  their  protection, 
building  them  up  and  strengthening  them  to  give  the 
public  better  service,  which  is  both  desirable  and 
necessary,  provided  such  consolidations  are  properly 
safeguarded  by  Governmental  supervision. 

The  proposal  to  create  regional  commissions  com- 
posed of  three  men  each,  drawing  maximum  salaries 
of  only  ^7,500  each,  and  providing  that  no  person  shall 
be  eligible  who  is  in  any  way  pecuniarily  interested  in 
any  railroad  property,  or  who  owns  any  railroad  stocks 
or  bonds,  or  who  holds  any  official  relation  to  any 
common  carrier,  is  little  short  of  Bolshevism,  for  who 
could  qualify,  or  who  could  be  obtained  under  these 
restrictions,  except  some  cheap  lawyer  or  politician? 
It  seems  to  me  that  we  have  already  had  more  than 
enough  of  the  theory  that  a man  is  disqualified  for 
public  service  who  happens  to  possess  the  evidence  of 
success  and  fitness  in  the  particular  field  in  which  he  is 
called  to  render  that  service. 

Too  large  systems  do  not  make  for  efficient  or 
economic  operation,  and  the  attempt  to  lodge  execu- 
tive powers  in  the  hands  of  a few  men  supervising 
groups  of  systems,  or  large  regions,  or  to  group  all  the 
roads  in  certain  sections  into  single  systems,  as  has  been 
elsewhere  proposed,  is  most  objectionable.  Large  sys- 
tems tend  to  congest  both  in  their  traffic  and  in  their 
official  handling,  for  the  executive’s  authority  is  neces- 


sarily  too  far  removed  from  the  activities  which  turn  the 
wheels  under  the  cars.  Such  an  organization  (and  your 
proposed  regional  commissions  and  the  National  Rail- 
ways Association,  with  the  powers  vested  in  them,  con- 
stitute such  an  organization)  inevitably  takes  on  bureau- 
cratic methods,  which  are  necessarily  slow,  and  the  result 
is  that  the  answer  comes  after  the  train  has  gone.  Re- 
sponsibility is  too  far  removed  from  the  seat  of  opera- 
tion, with  the  result  that  not  only  is  the  esprit  de  corps 
destroyed,  but  efficiency  of  operation  is  reduced  to  a 
minimum. 

The  proposal  to  create  a body  to  be  known  as  “The 
National  Railways  Association”  to  facilitate  the  return 
of  the  railroads  to  their  owners  would,  I believe,  be 
commendable,  provided  its  functions  should  be  con- 
fined within  that  scope,  but  to  create  such  a body  as  a 
permanent  institution  to  gather  under  its  control  one 
third  of  the  excess  earnings  of  all  the  railroads  of  the 
country,  as  provided  in  the  Bill,  is  a measure  fraught 
with  the  greatest  danger.  As  money  would  accumu- 
late in  the  hands  of  the  National  Association,  there  is 
practical  certainty  that  the  aggregate  fund  would,  in 
due  time,  far  over-reach  the  immediate  necessities  of 
the  Association,  with  respect  to  rolling  stock  purchases 
and  the  like,  and  it  is  beyond  human  nature  to  con- 
ceive that  when  this  fund  should  become  reasonably 
large  in  proportions,  the  Association  would  not  begin 
to  look  around  for  means  of  spending  it,  either  in  the 
construction  of  competing  railroad  lines,  or  in  the  ini- 
tial steps  of  a program  of  actual  Government  owner- 
ship. 

In  this  connection,  it  is  pertinent  to  point  out  also 
that  the  Railroad  Administration,  as  a purely  war 
measure,  purchased  a large  amount  of  rolling  stock, 
which,  under  war  conditions,  cost  much  more  than  the 
normal  price  for  such  equipment.  The  Railroad  Ad- 


ministration  has,  as  you  know,  attempted  to  force  this 
equipment  upon  the  railroads  of  the  country,  even  at 
the  exorbitant  cost  at  which  it  was  acquired,  as  just 
indicated.  Such  forced  allocation  of  the  equipment 
in  question  is,  to  our  minds,  unjust  and  immoral,  and 
we  are  utterly  opposed  to  any  measure  which  may  even 
remotely  contemplate  such  action.  Senate  Bill  No. 
S-5679  gives  no  assurance  whatever  that  the  National 
Association  in  leasing,  or  subletting,  this  Government 
equipment  to  needy  roads  would  not  do  so  on  the  basis 
of  the  original  exorbitant  and  abnormal  cost,  and  it  is 
our  contention  that  if  the  individual  roads  are  to  re- 
lieve the  Government  of  its  war  purchases  of  equip- 
ment, this  must  be  accomplished  on  equitable  terms, 
with  due  reference  to  the  normal  cost  of  such  equip- 
ment and  only  with  the  consent  of  the  roads  in  ques- 
tion. In  other  words,  we  hold,  as  already  stated,  that 
the  Government  purchased  this  rolling  stock  as  a 
necessary  war  measure,  just  as  the  Government  pur- 
chased motor  trucks  and  other  war  equipment,  which 
surplus  equipment  the  Government  is  now  obliged  to 
sell,  or  dispose  of,  at  the  inevitable  sacrifice  price,  and 
if  that  is  true  in  the  case  of  motor  trucks  and  other 
miscellaneous  equipment,  the  same  rule  should  apply 
in  the  case  of  railroad  rolling  stock,  and  the  Govern- 
ment should  absorb  the  inevitable  loss  on  this  score 
also  as  a necessary  expense  of  the  war.  We  shall  be 
opposed,  therefore,  to  any  measure  that  may  provide 
otherwise. 

To  sum  up  our  position,  therefore,  we  find  it  im- 
possible to  approve  the  Warfield  Plan  on  the  ground 
that  it  is  a compromise,  and  an  attempted  straddle 
which,  to  our  minds,  is  worse  than  outright  Govern- 
ment ownership  and  quite  impossible.  Accordingly, 
we  are  unalterably  opposed  to  the  passage  of  the  above 
Bill,  and  we  take  the  position  that  the  President  and 


the  Administration  should  carry  out,  in  terms,  the 
promise  conveyed  in  the  President’s  Proclamation. 
We  believe  that  the  strength  of  the  railroad  security 
holders  and  the  railroad  owners  should  be  directed 
toward  securing  the  return  of  the  railroads  to  their 
owners  at  the  earliest  possible  date;  that  whatever 
Federal  legislation  is  enacted  to  provide  for  improved 
conditions,  over  those  which  existed  prior  to  the  war, 
should  confine  itself  to  the  elimination  of  multiplied 
jurisdictions  and  the  centralization  of  control  in  the 
hands  of  the  Federal  Government  as  far  as  rates,  wages, 
security  issues  and  operating  conditions  are  concerned. 
I mean  by  this  that  Congress  should  instruct  the  Inter- 
state Commerce  Commission,  or  other  supervising 
bodies,  to  correlate  rates  and  wages  so  as  to  enable 
the  roads  to  earn  a proper  return  upon  their  invest- 
ment; in  other  words,  to  provide  that  rates  be  placed 
upon  a level  which  will  bear  proper  relations  to  the 
wages  imposed  by  Governmental  edict.  We  believe 
that  many  of  the  roads  could  be  returned  to  their 
owners  immediately.  Others  could  be  returned  later, 
and  in  regard  to  still  others  specific  plans  might  have 
to  be  worked  out  to  avoid  disaster,  but,  as  stated  early 
in  this  letter,  in  our  minds  the  only  way  to  return  the 
roads,  as  promised  by  the  President,  is  to  return  them, 
and  we  are  utterly  opposed  to  any  compromise  legis- 
lation which  will  in  any  way  deprive  the  roads  of  their 
inherent  rights,  or  move  us  one  step  nearer  socialism 
or  Government  ownership.  It  is  with  great  regret  that 
we  find  ourselves  in  opposition  to  your  program,  which 
I trust  we  have  not  misconstrued,  and  you  will  under- 
stand, I am  sure,  our  resultant  inability  to  further  sup- 
port the  actions  of  the  National  Association  of  Owners 
of  Railroad  Securities  in  this  connection,  either  with 
funds  or  with  our  influence. 

That  our  position  may  be  known  to  the  other  mem- 


8 


bers  of  the  Committee  of  Seventy,  I am  taking  the 
liberty  of  forwarding  a copy  of  this  letter  to  each 
member  of  the  Committee.  The  above  Statistical 
Exhibit  I am  returning  to  you  direct,  under  separate 
cover,  and  wish  to  express  to  you  my  great  apprecia- 
tion of  your  courtesy  in  loaning  it  to  me. 

Very  truly  yours, 

J.  P.  Harris, 

Vice  President. 


NATIONAL  ASSOCIATION  OF 
OWNERS  OF  RAILROAD  SECURITIES 

THE  CONTINENTAL  BUILDING 

S.  DAVIES  WARFIELD, 

President 


BALTIMORE,  MD.  May  3,  1919 


Mr.  J.  R.  Nutt, 

Cleveland,  Ohio. 

My  dear  Mr.  Nutt: 

I enclose  a copy  of  my  reply  to  a letter  received  from 
Mr.  J.  P.  Harris,  Cleveland,  Ohio,  copy  of  which  he 
states  he  sent  to  the  members  of  the  Committee  of 
Seventy. 

The  action  of  this  gentleman  in  sending  his  letter  to 
the  Committee  of  Seventy  before  its  receipt  by  me  with 
opportunity  to  answer,  forces  me  to  the  conclusion  that 
motives  other  than  the  interests  of  railroad  security 
owners  has  prompted  such  action  on  his  part. 

Apart  from  the  lack  of  courtesy  and  due  regard  for 
conventionalities  in  such  cases,  his  letter  evidences  such 
a lack  of  knowledge  of  our  plan  and  Bill  and  their 
purposes  that  his  analysis  thereof  must  have  been  as 
much  of  a surprise  to  you  as  to  me.  Were  it  not  for 
the  “good  of  the  cause”  I should  never  have  attempted 
to  disclose  the  manifest  absurdities  of  this  gentleman’s 
position  and  burden  you  with  the  same. 

Very  truly  yours, 

S.  Davies  Warfield, 

President. 


10 


NATIONAL  ASSOCIATION  OF 
OWNERS  OF  RAILROAD  SECURITIES 

THE  CONTINENTAL  BUILDING 

S.  DAVIES  WARFIELD, 

President 

BALTIMORE,  md.  May  3,  1919 

Mr.  J.  P.  Harris,  Vice-President, 

Cleveland,  Ohio. 

Dear  Mr.  Harris: 

I regret  that  you  did  not  submit  your  analysis  of 
the  plan  of  the  Association  to  some  of  us  who  have  been 
giving  a great  deal  of  time  to  the  problem  and  have 
followed  closely  the  hearings  before  the  Senate  Com- 
mittee, as  you  would,  I think,  have  found  that  both  the 
bill  (S.  5679)  and  the  explanations  of  our  suggestions 
before  the  Senate  Committee  accomplish  exactly  the 
reverse  of  your  analysis.  Indeed,  so  fundamental  is 
your  misconception  of  the  entire  matter  that  I am 
wondering  if  you  could  have  examined  inadvertently 
some  other  bill. 

For  instance,  you  take  exception  to  the  bill  because 
the  standard  return  contemplated  by  the  Plan  is  to 
be  computed  on  the  “property  investment,”  whereas 
you  say:  “No  attempt  whatever  is  made  to  define  what 
is  meant  by  ‘property  investment’  This  miscon- 
ception on  your  part  is  complete.  It  seems  that 
you  confuse  “property  investment”  and  “securities.” 
The  bill  provides  (Section  17,  p.  25,  line  17  et  seq.)  that 
“The  commission  shall,  as  nearly  as  may  be,  es- 
tablish and  maintain  freight  and  passenger  rates, 
or  levels  of  rates  or  charges  in  each  rate-making 
district  that  will  enable  the  carriers  as  a whole 
in  each  district  and  subject  to  this  act,  to  earn  an 
annual  net  railway  operating  income  equal  to  not 


n 


less  than  six  per  centum  on  the  combined  property 
investment  account , determined  in  accordance  with 
the  accounting  regulations  of  the  commission.” 
Nothing  is  more  definite,  certain,  easy  of  ascertainment 
and  impossible  to  become  the  matter  of  controversy 
than  the  property  investment  accounts  of  the  carriers 
and  as  this  point  was  made  clear  by  my  testimony, 
was  expressly  defended  as  a proper  basis  for  rate 
making  in  my  letter  to  the  Chairman  of  the  Committee 
which  is  printed  in  the  record  with  my  testimony,  and 
is  clearly  stated  in  that  part  of  the  bill  which  contains 
the  mandate  to  the  Interstate  CommerceCommission, 
I cannot  understand  how  you  could  derive  any  impres- 
sion to  the  contrary  if  you  gave  to  the  bill  and  to  the 
testimony  that  discriminating  reading  which  the  As- 
sociation had  some  right  to  expect  before  any  of  its 
members  should  reach  and  circulate  unnecessarily 
vehement  conclusions  adverse  to  those  of  the  Executive 
Committee  which  were  arrived  at  after  careful  con- 
sideration and  were  subsequently  approved  by  the 
Committee  of  Seventy. 

It  was,  of  course,  unnecessary  to  employ  the  full 
expression  “property  investment  account”  at  every 
point  in  the  bill,  but  you  will  find  it  in  a second  mandate 
to  the  Commission  on  page  28,  line  8.  Indeed,  the  fun- 
damental basis  of  our  plan  is  to  give  the  Commission 
a mandatory  and  definite  rule  for  rate  making,  and  I 
am  encouraged  to  know  that  you  are  the  only  one  who 
has  given  our  plan,  our  efforts  or  our  bill  more  than  a 
cursory  analysis  without  discovering  that  we  are  op- 
posing the  regional  consolidations,  and  like  mechanical 
devices,  because  of  their  delay,  illegality,  uncertainty 
and  indefiniteness  in  assuring  an  adequate  rate  factor. 

You  say:  “The  Warfield  Plan  makes  no  provision 
whatever  for  lean  years.”  On  the  contrary,  if  you 
had  read  either  the  plan  or  the  bill  you  would  have 


12 


found  that,  in  addition  to  the  one-third  of  their  earn- 
ings over  six  per  cent,  the  carriers  receiving  excess 
earnings  may  be  permitted 

“in  accordance  with  regulations  to  be  prescribed 
by  the  commission  and  when  and  to  the  extent 
found  desirable  in  the  public  interest,  to  set  up 
and  maintain  on  their  books,  before  the  excess 
earnings  reduction  shall  apply,  such  corporate 
reserves  as  a margin  of  safety  for  the  protection  of 
their  credit,  or  for  working  capital  or  otherwise, 
etc.”  (S.  5679,  p.  29,  line  29.) 

Other  reserves  to  meet  contingencies  and  disasters 
are  expressly  contemplated  both  by  the  bill  and  by  the 
plan  and  I am  again  forced  to  the  conclusion  that  you 
have  not  read  either  with  that  care  which  the  im- 
portance of  the  subject  and  the  emphasis  of  your  dis- 
sent would  warrant. 

You  comment  on  the  employment  of  one-third  of 
the  excess  earnings  fund  for  the  benefit  of  labor  is 
equally  unfortunate  in  its  failure  to  analyze  either  the 
situation  or  the  plan  or  the  bill.  You  object  to  the 
distribution  because  labor  has  contended  for  a uniform 
rate — I suppose  you  mean  wage  scale — on  all  railroads 
and  say  that  the  use  of  labor’s  one-third  of  the  funds,  as 
proposed  by  us,  “to  reward  employees  of  prosperous 
roads,  or  regions,  would  immediately  create  an  in- 
equality of  rates  (?),  which  would  at  once  result  in 
demands  for  further  increases  on  all  other  roads  to 
re-establish  uniformity  of  rates  (?),  working  conditions, 
insurance  or  pension  allowances,  etc.” 

We  are  not  concerned  with  the  machinery  for  this  dis- 
tribution, nor  whether  it  will  be  conducted  for  the 
benefit  of  all  railway  employees  or  merely  for  the  em- 
ployees of  the  respective  regions  in  which  the  fund  is 
produced.  We  had  carefully  considered  the  point  you 
mention  and  found,  by  analysis  of  the  totals  that 


13 


the  total  fund  which  labor  would  have  received  had 
the  plan  been  in  operation  during  the  year  1917  would 
have  been  approximately  335,000,000  as  against  the 
total  present  wage  account  of  32,500,000,000  or  about 
1.4  per  cent.  It  is  obvious  that  a fund  of  this  character 
must  be  employed  not  as  a direct  distribution  but  to 
purchase  insurance  or  similar  benefits  as  a reward  for 
faithful  and  efficient  service  and  would  furnish  a con- 
stant factor  tending  to  assure  loyalty  and  fidelity. 
Hence  your  supposition  that  the  process  involves 
profit  sharing  in  an  objectionable  sense  is  not  sustained 
by  the  facts.  There  is  a consensus  of  opinion  that 
proper  remedial  legislation  will  be  greatly  expedited 
if  some  recognition  is  made  of  labor. 

Your  application  of  the  plan  to  the  supposed  case 
of  the  expenditure  of  31,000,000  to  save  annually 
3200,000  mystifies  me.  You  say  that  one-third  of  the 
corporate  saving  would  accrue  to  the  corporation  for 
payment  of  interest  on  the  improvement,  “The  other 
two-thirds  going  to  interests  that  had  no  responsibility 
in  the  providing  the  31,000,000,”  and  ask  how  can  we 
conceive  that  a Board  of  Directors  would  every  author- 
ize the  expenditure?  By  expending  31,000,000  your 
property  investment  account  would  automatically 
entitle  the  road  (one  which  is  presumed  by  you  to  be 
earning  in  excess  of  the  standard  return)  to  retain 
360,000,  leaving  3140,000  excess  earnings  subject  to 
excess  earnings  reduction,  of  this  the  railroad  would 
receive  346,000  in  addition  to  the  360,000  which  you 
seem  to  have  lost  sight  of  entirely. 

You  say  that  another  weakness  is  that  the  plan 
takes  too  much  surplus  away  from  the  strong  roads 
and  leaves  them  without  means  to  take  over  the 
weaker  lines.  On  the  contrary  there  is  a direct  in- 
centive to  the  stronger  line  to  pursue  that  course  in 
order  to  retain  a larger  percentage  of  its  excess  earnings. 


14 


It  is  readily  conceivable  that  the  intercorporate  agree- 
ment for  consolidation  would  share  this  resulting  bene- 
fit equitably  between  the  two  lines  and  further  stimulate 
the  process. 

Your  criticism  of  the  provision  of  the  bill  to  the  effect 
that  the  regional  commissioners  must  not  be  pecuniarily 
or  otherwise  interested  in  any  railroad  security  or 
property,  etc.,  as  being  “little  short  of  Bolshevism” 
is,  I regret  to  say,  as  unfortunate  as  some  of  the  other 
analyses  contained  in  your  letter.  If  you  had  examined 
or  considered  the  bill  with  any  care  or  discrim- 
ination whatever,  you  would  have  found  that  the 
qualifications  adopted  by  us  for  regional  commissioners 
are  substantially  the  qualifications  which  are  now  and 
for  years  have  been  the  qualifications  for  members  of 
the  Interstate  Commerce  Commission,  and  notwith- 
standing the  bad  results  we  have  gotten  from  that 
Commission  due  to  inadequate  legislation,  the  fact 
remains  that  there  has  never  been  a breath  of  scandal 
or  a word  of  reproach  affecting  the  integrity  of  any 
member  of  the  Commission  since  its  organization  in 
1884  and  the  general  confidence  of  the  public  in  the 
good  faith  of  the  Commission,  with  the  Bolshevist 
qualifications  which  displease  you,  is  the  one  bulwark 
making  it  possible  for  the  railroads  to  avoid  absolute 
confiscation.  If  you  think  that  what  you  term  the 
personal  unpopularity  of  Burleson,  and  the  genuine 
antipathy  of  the  American  people  toward  government 
ownership  makes  it  opportune  for  the  owners  of  the 
railroads  to  go  before  Congress  and  demand  that  estab- 
lished safeguards  which  have  been  approved  for  a 
generation  by  the  public  are  now  to  be  junked,  your 
idea  of  the  common  sense  of  the  situation  would,  I 
fear,  never  coincide  with  the  purposes  of  the  Associa- 
tion. 

No  less  startling  is  your  misconception  of  the  Na- 


15 


tional  Railways  Association  which  is  proposed  in  order 
to  take  over  some  of  the  burden  of  equipment  forced 
on  the  carriers,  assist  in  liquidating  federal  control, 
and,  above  all,  to  bring  the  members  of  the  Interstate 
Commerce  Commission  in  contact  with  eight  of  the 
best  operating  and  financial  men  in  active  conduct  of 
the  railroads.  To  call  this  a step  toward  bureaucratic 
methods  is  positively  amusing.  The  railroad  trustees 
are  to  be  nominated  by  the  Boards  of  Directors  of  all 
the  railroads,  for  limited  terms,  without  compensation. 
Bureaucratic!  It  would  provide  an  agency  for  the 
most  profound  public  service  and  usefulness,  with  no 
visitorial  power  over  the  roads  but  with  a desirable 
opportunity  for  aiding  in  a sound  program  of  unifica- 
tion. You  refer  to  the  regional  commissions  and  the 
Railway  Associations  as  constituting  a large  system 
“which  tends  to  congest  both  in  their  traffic  and  in 
their  official  handling.”  Neither  the  plan  nor  the  bill 
brings  the  regional  commissions  and  the  Railways 
Association  in  any  remote  contact  whatever,  except 
that  they  are  mentioned  in  the  same  bill,  so  the  para- 
graph in  which  you  misunderstand  those  features  of 
the  plan  does  not  really  afford  me  anything  sufficiently 
definite  to  respond  to. 

You  are  apprehensive  lest  the  National  Railways 
Association  accumulate  too  much  money  through  the 
excess  earnings  fund.  As  this  fund  is  always  subject  to 
the  general  adjustment  of  rates  and  as  past  experience 
shows  that  a fund  much  greater  than  we  can  expect 
could  have  been  absorbed  in  providing  a car  supply 
reserve  for  the  common  use  of  all  carriers  and  as  the 
requirements  in  the  way  of  extraordinary  facilities  for 
the  joint  use  of  carriers  are  increasing  in  cost  and  diffi- 
culty year  by  year,  it  is  too  obvious  for  serious  concern 
that  the  fund  would  neither  be  adequate  or  excessive. 

You  complain  because  our  bill  provides  “no  assur- 


16 


ance  whatever  that  the  National  (Railway)  Association 
in  leasing  or  subletting  this  Government  equipment  to 
needy  roads  could  not  do  so  on  the  basis  of  the  original 
exorbitant  and  abnormal  cost,  etc.”  The  bill  goes  as 
far  in  that  direction  as  any  thoughtful  man  could 
advise.  It  provides  (Sec.  34,  p.  59,  1,  24)  that  the 
National  Railways  Association 

“shall  have  power  to  purchase  from  the  limited 
states  all  such  equipment,  cars,  engines,  or  other 
railway  property  as  may  have  been  purchased  * * 
by  the  United  States.  * * * The  Association  and  the 
Railroad  Administration  shall  have  the  power  to 
agree  upon  such  value,  which  may  be  less  than  the 
original  cost  thereof;  and  the  Railroad  Adminis- 
tration is  hereby  authorized  to  sell  and  transfer 
any  such  equipment  to  the  Association  or  to 
others  upon  fair  and  reasonable  terms.” 

So  you  see  that  it  is  quite  clear  that  you  are  absolutely 
wrong  in  asserting  that  the  bill  does  not  go  as  far  as  it 
is  wise  or  necessary.  The  present  Federal  control  act 
and  Mr.  McAdoo’s  budgets  contemplated  purchase  by 
the  railroads  at  cost.  We  propose  that  the  Railroad 
Administration  shall  be  authorized  to  purchase  on  a 
fair  basis  and  it  is  absolutely  absurd  to  suggest  that  the 
National  Railways  Association,  operated  by  railroad 
men,  and  organized  not  for  profit  but  to  assist  the  com- 
merce of  the  people,  would  not  offer  a fair  rental  to  the 
needy  lines. 

As  for  your  statement  that  the  plan  is  a “straddle” 
or  a “compromise,”  I suppose  you  mean  that  it  shows 
some  faint  recognition  that  we  have  passed  out  of  the 
era  of  Jay  Gould  and  Jim  Fisk.  The  interesting 
program  which  you  endorse  contemplates,  I note,  the 
immediate  return  of  the  railroads,  legislation  or  no 
legislation,  but  preferably  with  legislation  centralizing 


17 


“rates,  wages,  security  issues  and  operating  conditions 
in  the  Federal  Government,”  and  instructing  the  Com- 
mission “to  correlate  rates  and  wages  so  as  to  enable 
the  roads  to  earn  a proper  return  upon  their  invest- 
ment.” Permit  me  to  say  that  there  has  been  a great 
deal  of  that  kind  of  talk,  but  this  Association,  being 
desirous  of  results,  formulated  a plan  and  a bill  which 
exhibit  a decent  respect  for  the  temper  of  the  people 
and  has  received  sufficient  support  to  justify  us  in  the 
belief  that  we  may  be  able  to  have  its  fundamentals 
accepted  by  Congress. 

Let  me  express  the  hope  that,  in  view  of  your  great 
delay  in  expressing  your  disapproval,  the  necessities  of 
the  Association  for  additional  emergency  funds  men- 
tioned in  the  letter  which  seems  to  have  provoked  your 
reply,  has  not  been  the  cause  of  your  criticism  of  our 
plan  which  had  been  before  you  and  the  general  public 
for  months. 

The  fact  that  you  are  alone  in  your  willingness  to 
see  the  railroads  thrown  back  on  their  owners  “at  the 
earliest  possible  date”  and  apparently  without  refer- 
ence to  legislation— relieves  me  of  any  embarrassment 
which  your  ill-advised  criticism  might  ordinarily 
entail,  for  there  is  not  a thoughtful  banker  of  my 
acquaintance  who  entertains  your  views  as  to  the 
proper  attitude  for  the  security  owners  to  adopt  at  this 
juncture  or  as  to  the  unprotected  return  of  the  rail- 
roads. The  great  concern  felt  at  the  dangers  of  such  a 
procedure  is  evidenced  by  the  various  plans  proposed 
to  Congress  to  avoid  just  the  situation  you  wish  to 
create,  none  of  these  plans  would  therefore  meet  your 
approval. 

Since  you  advise  that  you  have  communicated  your 
views  to  your  Board  of  Directors,  and  since  those  views 
as  I have  pointed  out  are  so  wholly  unjustified  by  any 
provision  of  our  bill,  may  I ask  that  you  also  lay  this 


18 


communication  before  them — and  be  good  enough  to 
advise  me  of  any  others  in  addition  to  the  Committee 
of  Seventy  to  whom  you  may  have  communicated 
your  erroneous  impressions  in  order  that  I may  keep 
the  record  straight  in  this  matter  of  such  grave  im- 
portance. 

If  you  should  desire  any  further  information  about 
this  matter,  permit  me  to  request  that  you  get  in 
touch  with  me  personally  and  not  through  corre- 
spondence, as  I am  too  much  occupied  with  con- 
structive work  of  the  Association  to  enter  upon  pro- 
longed and  unnecessary  explanations  of  this  character. 

Very  truly  yours, 

S.  Davies  Warfield, 

President. 


19 


The  Citizens  Savings  & Trust  Co. 

EUCLID  AVENUE  NEAR  EAST  9th  ST. 
CLEVELAND,  OHIO 


May  9,  1919. 

S.  Davies  Warfield,  President, 

National  Association  of  Owners  of 
Railroad  Securities, 

Baltimore,  Md. 

Dear  Mr.  Warfield: 

Your  letter  of  May  3rd  did  not  reach  me  until  May 
6th,  although  I had  already  seen  a copy  of  it,  which  was 
received  by  Mr.  Nutt  the  day  before.  I am  very  sorry 
to  note  that  you  have  construed  my  criticism  of  the 
“Warfield  Plan”  as  a criticism  of  you  personally. 
You  may  be  assured  that  such  is  not  the  case,  if  for 
no  other  reason  than  my  high  regard  for  you  and  your 
sincerity  in  this  matter.  I wrote  my  letter  and  dis- 
tributed it  upon  the  assumption  that  not  only  you  but 
all  other  members  of  the  Committee  would  be  inter- 
ested in  knowing  our  views,  to  the  end  that  there 
might  be  no  misunderstanding  of  our  position  in  the 
light  of  the  action  taken  by  the  Committee  of  Seventy, 
and  in  regard  to  which  you  will  recall  I reserved  judg- 
ment, pending  further  study,  in  my  personal  conversa- 
tion with  yourself  and  one  of  your  attorneys  at  the 
close  of  the  meeting  in  question.  I trust,  therefore, 
that  upon  further  reading  of  my  letter,  and  further  re- 
flection, you  will  understand  that  no  improper  motives 
have  dictated  my  action  or  that  of  our  Board  of 
Directors.  Accordingly,  I shall  refrain  from  answering 
such  portions  of  your  letter  as  may  have  been  prompted 
by  impressions  to  the  contrary,  and  shall  confine  my 
reply  to  pointing  out  what  seem  to  me  to  be  your  funda- 
mental errors  as  to  our  position  and  as  to  what  your 
Plan  provides. 


20 


I think  that  if  you  will  read  my  letter  again,  you 
will  find  that,  briefly  stated,  our  fundamental  objec- 
tions to  your  Plan  are  as  follows: 

1.  You  have  intimated  that  it  is  either  the  “War- 
field  Plan”  or  something  more  radical.  Your  position 
is  indicated  by  your  statement  (Supplementary  State- 
ment, February  13,  1919,  bottom  of  page  10) 

“It  may  not  sound  popular  to  require  that  these 
excess  earnings  be  put  into  a fund  in  the  public 
interest,  but  the  security  owners  of  the  railroads 
are  face  to  face  with  either  subjecting  themselves 
to  this  or  having  the  attempt  made  to  reduce 
their  securities  to  a point  they  know  not  where.” 
To  this  we  cannot  subscribe.  Addressing  Congress  in 
December  last,  President  Wilson  said: 

“It  would  be  a disservice  alike  to  the  country 
and  to  the  owners  of  the  railroads  to  return  to  the 
old  conditions  unmodified.  These  are  conditions 
of  restraint  without  development.  There  is  nothing 
affirmative  or  helpful  about  them.  Some  new  ele- 
ment of  policy,  therefore,  is  necessary,” 
and  we  refuse  to  believe  that  the  President,  who  in  his 
Proclamation  gave  a specific  pledge  to  return  the  rail- 
roads to  their  owners  without  penalty,  will  break  faith 
with  his  fellow  countrymen.  We  prefer,  therefore,  to 
rely  upon  the  honesty  of  public  opinion  in  dealing 
with  the  situation,  rather  than  to  assume  that  the 
public  will  be  unfair. 

2.  In  answer  to  my  contention  that  Senate  Bill 
No.  S-5679  makes  no  attempt  whatever  to  define  what 
is  meant  by  “property  investment,”  you  cite  Section 
17,  page  25,  line  17  et  seq.  Let  me,  however,  under- 
line the  essential  words: 

“Not  less  than  six  percentum  on  the  combined 
property  account  determined  in  accordance  with 
the  accounting  regulations  of  the  Commission. ” 


21 


The  property  accounts  of  the  railroads  were  not  re- 
quired to  be  kept,  and  were  not  kept,  in  accordance 
with  any  rules  of  the  Interstate  Commerce  Commission 
prior  to  1907,  because  there  were  no  such  rules.  The 
great  bulk  of  the  investment  accounts  were  on  the 
carrier’s  books  prior  to  that  date.  Since  June  30, 
1907,  property  accounts  are  kept  presumably  in 
accordance  with  the  rules  of  the  Commission,  but 
because  of  optional  methods  allowed,  the  accounting 
has  been  upon  various  bases.  On  the  whole,  there- 
fore, there  is  no  such  thing  as  “property  accounts 
determined  in  accordance  with  the  accounting  regula- 
tions of  the  Commission,”  unless  you  mean  to  allow  the 
carriers  a return  only  upon  that  portion  charged  since 
June  30,  1907.  On  this  point,  need  I do  more  than  call 
attention  to  the  cases  now  being  argued  on  behalf  of 
the  Kansas  City  Southern  and  other  railroads  to  deter- 
mine this  very  point,  which  cases  have  been  in  long 
dispute  and  are  now  in  process  of  being  carried  to  the 
highest  courts? 

3.  I repeat,  no  provision  whatever  is  made  for  lean 
years.  In  your  answer,  you  quote  from  the  Bill, 
page  29,  line  29  (?)  (i.  e.  10  et  seq.).  Again,  I under- 
line the  essential  words: 

“Carriers  receiving  excess  earnings  may  be  per- 
mitted, under  the  direction  of  and  in  accordance 
with  regulations  to  be  prescribed  by  the  Commission 
and  when  and  to  the  extent  found  desirable  in  the 
public  interest ,”  etc. 
and 

“The  Commission  may  in  its  discretion  and  when 
deemed  desirable  in  the  public  interest,  cause  to  be 
set  up  out  of  operating  income,”  etc. 

To  our  minds  the  record  of  existing  Governmental 
regulatory  bodies  exercising  such  plenary  and  discre- 
tionary powers  could  hardly  justify  even  the  most 


22 


optimistic  in  finding  any  assurance  whatever  that 
under  the  provisions  of  your  bill  there  will  be  any 
excess  earnings,  or  any  practical  provision  for  the 
protection  of  railroad  credit.  To  hold  otherwise  is  a 
marvelous  triumph  of  faith  over  experience. 

Net  income  is  a result  not  only  of  rates,  but  also  of 
operating  conditions  and  volume  and  density  of  traffic. 
Suppose  rates  are  established,  which  it  is  estimated 
will  provide  6%  on  an  agreed  property  investment,  and 
actual  practice,  as  has  so  frequently  been  the  case, 
should  fail  to  produce  6%.  Who,  under  the  pro- 
visions of  your  Bill,  is  going  to  make  up  the  deficit  to 
the  railroads?  In  effect,  would  it  not  be  a case  of 
providing  the  medicine  after  the  patient  is  dead? 

4.  In  the  final  analysis,  the  “Warfield  Plan,”  as 
we  view  it,  is  a minimum  guarantee  plan  and  is,  there- 
fore, a compromise  with  Government  ownership, 
if  not  actually  tantamount  not  only  to  Government 
control  but  practically  Government  ownership  without 
compensation  to  the  owners  therefor.  We  consider 
the  theory  of  a guarantee  so  fundamentally  wrong  that 
the  method  of  arriving  at  the  plan  is  inconsequential. 
It  is  true  that  your  Bill  does  not  specifically  provide 
for  this,  but  the  inevitable  end  of  the  course  proposed 
provides  the  equivalent  of  both  Government  ownership 
and  operation,  for  when  the  Government  says  to  the 
railroads,  in  effect,  “You  shall  not  be  permitted  to 
accumulate  earnings  to  pay  the  principal  of  your  out- 
standing bonds,”  the  Government  will  be  compelled, 
in  justice,  to  provide  for  such  payments,  and,  when 
that  point  is  reached,  actual  Government  ownership 
and  operation  will  begin. 

In  conclusion,  I repeat,  in  our  opinion  certain  of  the 
railroads  could  be  returned  to  private  ownership  at 
once.  I have  already  suggested  the  form  of  Federal 
legislation  to  provide  for  the  return  of  the  roads  less 


23 


favorably  situated  at  the  moment,  but  we  protest 
against  the  policy  of  compelling  the  public  to  contribute 
to  a subsidy  to  maintain  the  improvidently  built  or  man- 
aged roads,  or  of  penalizing  those  systems  which  are 
efficiently  operated  and  which  are  fortunately  located 
with  respect  to  their  traffic,  in  order  that  some  of  the 
weaker  systems,  for  certain  of  which  a receivership 
might  be  the  best  antidote,  may  be  saved,  and  certain 
securities  which  never  should  have  been  issued  in  the 
first  place  and  which,  in  the  public  interest,  should  be 
re-organized,  may  be  made  secure. 

I have  taken  the  liberty  of  writing  you  in  lieu  of  a 
personal  conference,  because  I wish  all  of  our  associates 
to  know  our  position,  and  with  that  in  view  I am  send- 
ing a copy  of  this  letter  to  them. 

Very  truly  yours, 

J.  P.  Harris, 

Vice-President. 


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